Fed Set to Taper, Data Tapering as Well

MARKET SUMMARY

- Stocks sell modestly, a bit oversold at potential support.
- Fed set to taper, data tapering as well.
- Economic data remains so-so to decent.
- TV economists say 'wait until the second half,' but Consumer data suggests the economy is heading the other direction.
- About time for an oversold bounce but that is likely all it will be so use it accordingly.

Tough week takes indices to next potential support.

The stock indices finished the week with losses, though moderating quite significantly from the Thursday slam lower that broke the back of the consolidation attempt at near support.

SP500 -5.49, -0.33%
NASDAQ -3.34, -0.09%
DJ30 -30.72, -0.20%
SP400 -0.32%
RUTX -0.32%
SOX 0.35%

Tough decline but most of it happened in a couple of sessions. After holding at near support for a week the bottom broke and the damage came in a torrent. Look familiar? This is what happened three weeks back: the indices moved to a new high, tested a bit, then two quick days of selling crashed them back to the pre-breakout levels.

Stocks stair-step higher on the way up, they do the same thing on the way down. The step lower this week just happened to crash some important support. Not everything crashed; of course some solid leaders held the line, e.g. PCLN.

There was damage done, however, and it is very likely that the selling is not over. Sure the indices are now a bit oversold and they will bounce again; they always do in stair-steps, right? As there is some support where they closed out the week the bounce odds are up, particularly if there is some more downside to start next week. That would allow for the old slingshot move when investors panic some as the selling continues.

After this move, however, unless there is some catalyst to change the character, any bounce, whether from the Friday close or after a bit more early week selling, simply sets up more downside. Thus, use a bounce wisely.


He chose poorly.

THE ACTION

Futures tried to start higher Friday, but as the open approached they crumbled. Overnight China was up 6%! For about 5 minutes. Someone pushed the wrong button, the old 'oh you meant 5000 shares, not 500,000?' Easy come, easy go. by the close China was lower.

Europe took its cue from China, but it waived the spike and just stayed flat all day.

In the US, as noted, futures were higher, rebounding from Thursday's face plant. Hope springs eternal. It sprung for about two hours, peaked, then sprung a leak.

July housing starts were in line and permits beat a bit, but single family homes were the weakest since 11/2012.

Q2 Productivity topped expectations, but Q1 was revised lower by a factor of 3 (-1.7% versus 0.5% previously reported). Kind of a yea!, then ugh.

Labor costs spiked 1.4% versus -0.3% expected.

Not quite awe inspiring or, as seen with better data, not enough to forestall a Fed taper. Thus by the open futures were comfortably (uncomfortably?) negative.

But a lower open led to bids. For an hour. Stocks rallied, matched pre-market futures into midmorning, assisted by a weaker than expected August Preliminary Michigan Sentiment read (80.0 versus 85.1 expected, 85.1 prior). Stocks even rallied after the weaker Michigan number, as those still clinging to the hope of no Fed taper bought the data miss.

Then at 10:00CT, the midmorning bell, stocks peaked. They rolled, sold to session lows even undercutting the pre-market low. It was expiration so there was another obligatory bounce into the last hour but that was sold off hard at the close leaving the indices at session lows.

THE END RESULT

Closed at session lows, relatively modest losses, testing the next support levels on the indices.

DJ30 is down 7 of 10 sessions. SP500 8 of 10. NASDAQ 6 of 10. In May, DJ30's first leg lower before a relief bounce was 10 days in length. SP500 sold 9 sessions and then found a bottom to bounce in a relief move.

DJ30 is at the 50% Fibonacci retracement of the June to early August move. SP500 is at the 50 day SMA and the 38% Fibonacci retracement as well as the mid-June interim peak.

RUTX is showing a tight doji at the 50 day EMA. SP400 is at the 50 day SMA. SOX is at support from the bottom of the May to June trading range, a level that acted as lower support in several prior trading ranges over the past years.

In short, all indices are more or less at a significant support level after 10 days of selling. Indeed SOX is on its second downside leg of its pullback. Down an equal amount of days of other selloffs so a bit oversold, at support levels. Basically primed for a bounce.

It may come right away, it may come after a further selloff to start the week, kind of the move that flushes the near term sellers out and clears the move for a bounce.

As noted above, a selloff is likely not a new bottom to start the next leg. The May to June selling suffered two legs lower, so if this is like that there could easily be another leg. Of course as discussed Thursday, this last rally was the fifth leg since the November low. Five upside runs are about all you get in a move before it breaks down as volatility in the moves jumps. Volatility has jumped in the moves and this looks very much like a typical breakdown.

Again, the indices are oversold near term, getting close to a bounce, but even a bounce likely is just a relief move that sets up more selling. Either a selloff as in June and thus another 2 to 3 weeks of downside, or something more significant related to the Fed starting to pull the QE with what we are told is better data in the economic reports, but data that is not really corroborated in the earnings and outlooks of companies, particularly the retailers and other consumer related stocks.


THE NEWS

It was the best of times, it was the worst of times.



This past week saw more passable economic data in the mainstream monthly reports. Retail sales in line at 0.2%. PPI flat versus a 0.3% price rise anticipated. Initial jobless claims fell to 320K. New York PMI beat at 8.6. Philly Fed was solid at 9.3, Housing starts and permits beat.

Decent but not trending to recovery. Retail sales were inline but a third of June's read. Layoffs are finally slowing but hiring is not surging, and those jobs created are not the breadwinner jobs of past recoveries but the new US style of part-time jobs to get under the 30 hour threshold of the healthcare act.

New York manufacturing was lower than July. Philly manufacturing missed expectations and was less than half of June. Michigan Sentiment for August missed pretty big (80.0 versus 85.1 expected and prior). Industrial production and Capacity utilization missed.






In sum, the numbers are better but not anywhere near surging. The apologists on the financial stations say the data is not bad, that it takes a long time when you have a major collapse, etc.

BS. We suffered mightily in the 1970's with similar issues of gasoline shocks, massive new regulations, the effects of the 1960's massive new social programs. Hell, throw in impressively oppressive inflation and interest rates at 15% to 20%. It was a hell of a lot worse in many ways, yet when the right policies were implemented the economy roared back.

The policies in place now, after four initial years, are being rolled over into another four years unlike in the early 1980's. No pro-entrepreneur, no pro-growth policies to spark new businesses and thus generate new 'breadwinner' jobs as David Stockman calls them. No policies that rewarded investing in new businesses here in the US, that rewarded innovation and new ideas. In the 1980's, the policies implemented sparked massive US investment in R&D and new ideas, resulting in the explosion of the PC era. AAPL, MSFT, CSCO, INTC, DELL, and many, many thousands of companies exploded onto the scene and launched an entire new economy.

Today there are a few new companies that are innovating, but the hurdles to compete are so high, the reward for risk taking so limited that the numbers are a fraction of those in the past. Thus fewer and fewer new companies form in the US, and our companies that were once leaders are now trying to hang on. Indeed, CSCO just announced another 5% (4K) staff layoff to 'restructure' its employment structure, code for lowering its average worker hours to lessen the impact of the healthcare act.

That is what we get now: not companies that are thinking of expanding and increasing the workforce, but the majority, the vast majority, structuring to get through the bad times that are supposedly good times. Some are benefitting, but they are the huge conglomerates that were favored in the stimulus and the tax code changes. They are the equivalent of the French elite in the 'Tale of Two Cities.'

On the other side there are the small businesses that received no stimulus benefits and saw their taxes rise in so many ways: marginal rates, insurance costs spikes, more EPA and other federal agency regulations, less access to markets, less favored tax status. They have been crushed in this 'recovery' and millions have gone under while millions more are fighting a losing battle to keep the doors open and their employees at full time if they can or just keeping their jobs in place.


And let's not forget the consumer side, the reality to counterbalance the economic reports.

We hear from the experts and the clowns in DC that by golly things are just getting better. Slow, but my goodness progress. As noted, that is BS for the most part; this is the worst recovery in the entire modern era of the US.

Then there is the real data, the data the government reports don't cover or ignore. We saw this the past few weeks with reports, really coming to the fore of late.

I am talking about retailers and other consumer oriented companies warning about the future. The TV economists say the second half 2013 will see the recovery, that things are trending in the right direction. The consumer stocks say 'no.'

Sentiment is falling again. Gasoline, the healthcare act, crappy jobs, higher tax burdens, moochers on the system.

Friday saw JWN beat earnings but lower its entire 2014 guidance along with the second half of 2013 same store sales. Trending nicely higher, eh? JOSB warned about the rest of the year on Friday as well. Thursday Wal-Mart cut its sales forecast. Wednesday Macy's missed, noting taxes, gasoline and other drains on the consumer. RL and AEO lowered guidance.

Reports trending higher, recovery underway we are told, yet the companies dealing directly with the consumer are cutting their second half 2013 and 2014 outlooks even as we are told the second half will see a faster recovery. I have to call BS.


Queue the Fed for another grand irony.

And in all of this the Fed is going to taper. It may not have a choice. It is the only market for US treasury sales as for the past six months foreign buyers have conducted a taper of their own, tapering their purchases of US securities each month. As Bill Gross of PIMCO tweeted Friday, 'W/o central bank ck writing we only have ourselves 2sell2.' The Fed is the market, but it knows it has to get out of the market.



Thus, we see the data pumped and polished as best as possible, and when it still comes in just barely passable we are told the trend is good, recovery is imminent, blah, blah, blah. As I have said before, $85B/month and THIS GDP is all we get?

The grand irony is the Fed is set to taper EVEN AS the data in the second half, the supposed breakout period for the economy (how many such 'breakout periods' have we had in this grand recovery?) tapers itself.

Tapering into the taper. How poetic.


THE MARKET

OTHER MARKETS

Dollar: 1.3331 versus 1.3356 versus 13225 versus 1.3265 versus 1.3305 versus 1.3341 versus 1.3384 versus 1.3341 euro. Dollar cannot get up off the mat even as the Fed preps for tapering. Now to be fair the dollar index has set up a short double bottom at support and is primed to bounce back up in its range But, it should be jumping on a taper if everything was great, capiche? (watching 'The Godfather')

Bonds diving further: 2.83% versus 2.77% versus 2.71% versus 2.72% versus 2.62% versus 2.58% versus 2.59% versus 2.60% versus 2.64% versus 2.64% versus 2.60% ten year. Two big gaps lower on the week. Friday sold off further but then reversed off the lows and close to an old support level. Prepping for a relief move. Has the Fed lost control of the bond market? It is damn close.

Oil: 107.46, +0.13. Up on the week but slowing as it approaches the June and July peaks that are coincident with the peak in early 2012. Natural resistance here and slowing modestly.

Gold : 1371.00, +11.30. Gold has reversed. A bounce, a test after hitting the 50 day EMA, then a break through the 50 day EMA Thursday. The next test is a good entry.


TECHNICAL SUMMARY

INTERNALS

NASDAQ
Stats: -3.34 points (-0.09%) to close at 3602.78
Volume: 1.49B (-13.27%). Strangely quiet on expiration.

Up Volume: 721.28M (+520.4M)
Down Volume: 781.43M (-748.57M)

A/D and Hi/Lo: Decliners led 1.19 to 1
Previous Session: Decliners led 4.28 to 1

New Highs: 48 (+12)
New Lows: 32 (-14)

S&P
Stats: -5.49 points (-0.33%) to close at 1655.83
NYSE Volume: 728M (+9.64%)

A/D and Hi/Lo: Decliners led 1.86 to 1
Previous Session: Decliners led 4.45 to 1

New Highs: 67 (+18)
New Lows: 341 (-34)


DJ30
Stats: -30.72 points (-0.2%) to close at 15081.47


CHARTS

See analysis in the market overview of the Friday action.


LEADERSHIP

Some former leaders show clear near term rollovers that suggests more downside even if there is a near term relief bounce. UTX, MMM, GOOG, AMZN, MNKD, JPM.

Other leaders look solid still: LL, PCLN, NFLX, VRX, CLDX, WWWW, KORS, YNDX.

Precious metals are not bad: NG, IAG, NEM. They tested Friday, and if they can put in another couple of days of a test, they will be great.

Steel is not bad. CLF is in a nice test of its last move. STLD is trying to break from a range. MTL looks as if it wants to run again.

Money leaves some areas but it is very encouraging for further upside that the market is showing some beaten down areas looking ready to make an upside break.



SENTIMENT INDICATORS

VIX: 14.37; -0.36. Nothing in the VIX suggests a major selloff is brewing. Now don't put too much into that, or should I say more than is due. You may have heard this discussion before but it is worth a mention again. When the relationship between the VIX and the market changes such that VIX rises as the market rises, THAT is a true negative indication. That occurred in early 2000. It is not occurring now.

You can see SP500 rising since November 2012. Volatility, however, faded and has range-traded since. Volatility jumped up in May and June but as it rallied SP500 faded in a test, the most significant of the run. That is still normal action: market tests, VIX rises. Then on the last strong upside leg in June and July volatility tanked.

There is no rise in volatility as the stock market rises. Thus there is no VIX market top indication right now.

VXN: 14.73; -0.17
VXO: 14.37; -0.49

Put/Call Ratio (CBOE): 0.93; -0.03


Bulls and Bears:

Bulls faded just a bit while bears again held basically steady as both sides wait out the consolidation in the market after that last run. Good break upside Thursday in the midst of the caution.




Bulls: 48.4% versus 51.5% versus 52.1% versus 46.9% versus 43.8% versus 41.7% versus 46.8% versus 43.8% versus 45.8% versus 52.1% versus 54.2% versus 52.1% versus 47.9% versus 44.3% versus 47.4% versus 50.5%.

Background: Undercut 35%, the threshold for bullishness, in early June. As noted, hit 34% in early June. It did its job and the market is on the rally. Hard drop to 34 from 39.3% as economic reality and a choppy stock market hit. Off the 55+ level hit in late February. That was the highest level since April and May of 2011, the peak of the post-bear market high. 35% is the threshold level suggesting bullishness. To be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 19.6% versus 19.6% versus 19.8% versus 22.9% versus 25.0% versus 21.9% versus 22.9% versus 20.8% versus 19.8% versus 19.8% versus 19.8% versus 18.8% versus 19.6% versus 20.6% versus 20.6% versus 19.4% versus 19.6% versus 18.6% versus 18.8% versus 21.1% versus 21.1% versus 22.1% versus 21.1% versus 21.1% versus 22.3% versus 22.3% versus 23.4% versus 24.5% versus 24.5% versus 23.4% versus 25.5% versus 27.7% versus 27.7% versus 28.7% versus 27.7%.

Summary: Over 35% is the threshold to be really be a good upside indicator. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.


THIS WEEK

Wednesday and Thursday I went into detail about how to handle this market. I talked of two scenarios, a June-like pullback and a deeper pullback. Either one, of course, meant more selling.

Regardless of the scenario that shapes up, it is not a great time to commit a lot of new upside money to the market. Sure there will be good buys from great stocks such as PCLN on Friday. Other leaders look good as noted earlier, e.g. NFLX, LL, VRX . . .

There are stocks turning the corner as well, e.g. steel, homebuilders, precious metals. Some need tests, but they present upside opportunity because they are not in the limelight, i.e. they have not rallied substantially and are thus a target for sellers.

So there is upside possibilities, very real ones. But we are also looking at downside opportunity this week. Now it won't be right away. As noted above, the market likely bounces without a lot more downside given it is stretched two weeks lower; another push lower early in the week likely leads to a rebound. After the rebound more downside positions will present themselves.

On any oversold bounce, some upside leaders will set up and those stocks turning the corner will come off of tests of the initial breaks. On these we can play upside as they are the select, and if they survive the selling they are the ones that will rise well.

Ultimately I am not certain if this is the market top or not. Have my suspicions, but those are just good for the office pool. I want to make money so I do what the market and individual stocks tell me to do. Right now that has been go more into cash, watch for the true strong stocks to show they have the right stuff, and after the test of this initial selloff, look for downside to get into. That means not to start the week but after a relief bounce fails.



Support and resistance

NASDAQ: Closed at 3602.78

Resistance:
3616 is the November 2012 up trendline
The July 2013 intraday high at 3625
3695 is the upper channel line for the November 2012 to present uptrend.
Next major resistance is around 4100 as NASDAQ hits 13 year highs

Support:
The 50 day EMA at 3558
3532 is the May intraday high
3521 is the August 2000 low.
3502 is the May 2013 closing high
The 2011 up trendline at 3333
3295 is the June 2013 low selloff
The 200 day SMA at 3266
3227 is the April 2000 intraday low
3197 is the September 2012 post-bear market high
3171 is the October intraday high


S&P 500: Closed at 1655.83

Resistance:
The 50 day EMA at 1664
1687 is the May high and post-bear market high
The November up trendline at 1734

Support:
1654 is the June 2013 peak
1576 from October 2007, the prior all-time high
1569.48 is the 78% Fibonacci retracement of the April to May 2013 run
1560 is the June 2013 reversal low
1556 from July 2007
The 200 day SMA at 1550
1541 is the April 2013 closing low in that pullback inside the uptrend
1539 from June 2007
1531 is the recent high
1499 from January 2008
1475 is the September 2012 high
1471 is the October 2012 intraday high
1466 is the September 2012 closing peak and rally closing high
1440 from November 2007 closing lows


Dow: Closed at 15,082.16

Resistance:
The 50 day EMA at 15,302
15,318 is the June closing high
15,542 is the May 2013 intraday high

Support:
14,888 is the April peak and prior all-time high
14,844 is the June intraday low
14,551 is the June 2013 intraday low on the selloff (14,659 closing)
The 200 day SMA at 14,338
14,198 from the October 2007 high
14,149 is the February 2013 high
14,022 from 7-07 peak
14,010 from the early February 2013 consolidation


Economic Calendar

August 16 - Friday
Housing Starts, July (8:30): 896K actual versus 895K expected, 846K prior (revised from 836K)
Building Permits, July (8:30): 943K actual versus 934K expected, 918K prior (revised from 911K)
Productivity-Preliminary, Q2 (8:30): 0.9% actual versus 0.0% expected, -1.7% prior (revised from 0.5%)
Unit Labor Costs, Q2 (8:30): 1.4% actual versus -0.3% expected, -4.2% prior (revised from -4.3%)
Michigan Sentiment, August Preliminary (9:55): 80.0 actual versus 85.1 expected, 85.1 prior


August 21 - Wednesday
MBA Mortgage Index, 08/17 (7:00): -4.7% prior
Existing Home Sales, July (10:00): 5.20M expected, 5.08M prior
Crude Inventories, 08/17 (10:30): -2.812M prior
FOMC Minutes, 7/31 (14:00)

August 22 - Thursday
Initial Claims, 08/17 (8:30): 337K expected, 320K prior
Continuing Claims, 08/10 (8:30): 2959K expected, 2969K prior
FHFA Housing Price Index, June (9:00): 0.7% prior
Leading Indicators, July (10:00): 0.5% expected, 0.0% prior
Natural Gas Inventor, 08/17 (10:30): 65 bcf prior

August 23 - Friday
New Home Sales, July (10:00): 490K expected, 497K prior

By: Jon Johnson, Editor
Copyright 2013 | All Rights Reserved

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

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